Will Housing Sink the Economy?

While politics still looms large as a discussion in the United States with
the elections less than two weeks in the past, the talk has already shifted
from gridlock between Democrat controlled Congress and the Republican President.
Nancy Pelosi, the Speaker of the House supported a candidate for majority leader
in the House and that candidate was defeated. The candidate is largely seen
as a corrupt politician, due to being caught in a sting operation twenty-six
years ago involving bribery. Another candidate was supported by members of
the house, so the lack of consensus among Democrats is the new focus of political
(and financial) talk shows.

The market likes this even better than the initial scenario for Gridlock,
because there is even less chance of significant effect by efforts in Congress
if the controlling party can't speak with one voice. This has weakened Pelosi
politically while she does damage control.

Once again, the housing market appears to show new problems. Housing starts
were down to their lowest level seen since the beginning of the decade and
building permits fell to their lowest level since December 1997. Soft landing
proponents suggest the housing slow down is what will allow the economy to
slow and keep inflation under control, while still allowing the economy to
continue to grow. The real question is does the consumer keep spending, which
will allow this to occur.

In examining the labor market, it appears that unemployment continues to decline
and there are signs of wage pressure due to a somewhat tight labor market.
As long as the Fed doesn't raise rates, the economy will likely continue to
expand.

The real question is, with a three years supply of new homes to work through,
and with a record inventory of existing homes on the market, what will happen
to the jobs created by the home building industry, and what will happen to
home prices? Clearly, overbought markets are seeing a steady and rapid fall
in home prices. California is seeing severe price declines, but that is attributed
to the rapid rise in home prices seen through this decade. If other areas also
begin to see significantly declines in home prices, then it is more likely
the country will enter a recession than just see a slowing in the expansion.

Looking at the energy markets, oil lost $2.50 on Thursday, which also market
the market top. Oil closed even lower on Friday after losing nearly four dollars
from last week to close at $55.81. Natural Gas gained twenty-nine cents during
the week to close at $8.18.

To understand more about our view on the markets, we will have to look at
the charts.

Market Climate

We had suggested that at the beginning of the week, the markets could either
move up to break through resistance or down to break through the 20-day moving
average. The market continued to move higher week over week, with the 20-day
moving average obediently moving up to support price as it climbed.

A chart of the composite of over 8,000 stocks traded on the U.S. Stock markets
continues to be included.

The U.S. stock market composite chart:

Price walked the upper Bollinger Band until price reached the level of the
2006 highs (on May 9th). They retreated from those highs on Thursday and closed
even lower on Friday. Since this is the second time level has been approached
this year, we believe it to be a significant point of resistance, which, if
broken through, will provide support in the future. It is likely that the market
will have a bit of trouble moving up through this level.

Now that the market has managed to make a strong rally up to this point, RSI
indicates possible weakness here. If this is joined with a high of MACD and
a sharp reversal, then this could mark the local high. We will have to monitor
this for a possible reversal this week.

Now, let's take a look at the charts for the major indexes.

A look at the chart for the Dow Industrials is represented by the Diamonds
ETF (Amex:DIA).

Abbreviations and color key appears below:

Note the following order is Red, Yellow, Green, just like a stop light,
so it might be a helpful mnemonic:
Thick Red line represents the 200-day simple Moving Average (200DMA),
The yellow line represents the 50-day simple Moving Average, (50DMA)
The green line represents the 20-day simple Moving Average, (20DMA)
The light blue line represents the 3-day Moving Average, moved forward three
days in time, (3x3MA)
The thick blue line indicates the exponential 13-day Moving Average (13DMA)
Bollinger Bands are abbreviated as BB. There is an upper and a lower Bollinger
Band that varies in distance from a central moving average (shown as light
red/pink) based on the volatility of stock price movements.
RSI stands for Relative Strength Index. It is an oscillator, which can be used
to determine how overbought or oversold a stock may be.

There is little to be gleaned from the chart of the DIAmonds. At this time,
the DIAmonds have been walking the upper Bollinger Band. A definitive move
starting above the and collapsing within it could signal the start of a new
downtrend, however, that hasn't yet occurred. There is still more room to move
up toward the upper boundary of the uptrend channel.

The DIAmonds are still clearly in their four month uptrend, and they succeeded
in breaking up through the resistance that contained them for nearly three
weeks. The choppiness indicator indicates this was part of a trend move, and
that indicator hasn't yet reached the point of exhaustion yet.

The S&P 500 ETF, known as the Spyders (AMEX:SPY) is shown in the chart
below:

The SPYders broke through the resistance that contained them, in a similar
fashion to the DIAmonds. They too have been walking the upper Bollinger Band.
They appear somewhat different to the DIAmonds in that they have already reached
their upper channel boundary and also have a short term uptrend line that suggests
this uptrend may stall at around the $141 level.

Similar to the DIAmonds, the choppiness indicator signaled this latest move
was a trending move and it hasn't yet reached the point of exhaustion.

This week's NASDAQ 100 ETF (QQQQ) Chart is below:

This chart shows the QQQQs have broken upward to new highs for the year. The
QQQQs have been walking the upper Bollinger Band and moved sideways on Friday.
This move and other indicators suggests the momentum of the up move may be
failing and the QQQQs will either rest or decline from here. The $43 level
will likely provide support here though, so a short trade would have to be
made as a swing trade to enter the trade above $44 and exit near the $43 level.

The choppiness indicator has reached the level where trending moves are exhausted
so consolidation is likely at this time.

Fundamental Trends

The big surprise this week is that two retailers are back in the top five
after having made a hasty retreat the previous week. All five are repeats within
the previous two weeks.

There are five retail industries in the top screen. In addition, foreign banks
continue there, and are joined by the brokers, which have become red hot after
some much M&A activity and the recent IPO of the Nymex. There are two apparel
industries supplying retailers with product. Periodicals are also in the top
screen as recent offers to buy large newspapers have caused prices of companies
in the industry to vault upward.

The auto and truck industry is now in the top screen. Auto and Truck parts
retail is also in there as are the steel and steel alloy industries (lots of
steel in automobiles). There are still two petroleum industries in the top
screen (U.S. Integrated and Field Services). Finally, the most interesting
is the staffing industry. Staffing implies a need to fill jobs. This implies
expansion of the labor market or at least more competition to attract labor.

We continue to look for a bargain in the oil space. With a recent low put
in for the price of oil, perhaps we will get a sell-off in oil stocks and can
achieve a good entry.

The Industry leaders (ranked 1st-5th out of 190) are:

The laggards look almost the same as they did last week. The only addition
is home textile makers which appear to be a victim of the overall slow down
in the housing market. While many of these companies have material business
in other textile and related industries, such as supplying the apparel industry
with fabric, the huge inventory of new homes and existing homes on the market
clearly has investors concerned over the prospects of such a significant decline
in demand for products from these companies.

Drug stores are in sixth to last place, with concerns over competition from
Walmart in the generic drug space. We suspect this is also related to margin
impacts that are likely with Democrat initiatives to put a prescription drug
program into place, cutting margins to everyone related to the pharmaceuticals
industries.

The Industry laggards (ranked 186th-190th out of 190) are:

Trade Recommendations

We will be making another trade recommendation intraweek, as well as sending
out a short topic email on the VXN option volatility index and its correlation
to the NASDAQ market. These may come out on the same day and likely earlier
in the week than later.

Current Portfolio

We entered the trade is Skyworks Solutions (NASDAQ:SWKS) at $6.99. We encouraged
those that hadn't already entered the trade to be patient and try for an entry
between $6.75 and $6.80. The low for trading on Friday was $6.81 and was probably
about as good an entry as you will be afforded if you haven't already entered
this trade. We have a stop in at $6.70.

FDG has rebounded as a bottom appears to have been put in for the Canadian
Royalty trusts due to the Canadian government's decision to tax existing trust
beginning in four years. Coal continues to be unloved.

Generally, our model uses set stop prices to control risk. Index ETFs, including
DIA, SPY, QQQQ, and IWM are managed somewhat differently, in that trades will
be reversed to time the market, as opposed to using a set stop limit.

Unlike the majority of position trades in the fundamental trader, our ETF
trades may see us exit positions prior to specific profit goals being achieved,
as we are more concerned with positioning for the correct direction of the
market more than with achieving a specific profit level. The reason for this
is the profits come over time with a fair number of exchanges for long and
short trades.

* Initial stop prices are set to cause us to exit our positions if they close
below these levels. You will note they are generally kept pretty tightly the
opposite side of the trades we initiate. Historic volatility would imply that
intraday price action may trade outside of these values, so that condition
is insufficient to cause an exit from an existing position. On significant
movement beyond our stop prices, we may issue an intraday message to exit the
position or to maintain the position. You may chose to implement an absolute
stop below these suggested stop values, but that stop should be wide enough
to take care of the daily volatility for the stock in question. You can examine
the candlesticks for an idea of intraday price fluctuations.

Entry prices are adjusted to account for dividends paid. The stock price was
adjusted by your broker, to reflect the dividend taken out. The non-adjusted
entry price reflects the actual entry price, without the adjustment for dividend
values.

LVPB Concept: The concept is a Light Volume Pull Back, where
a stock's price will pull back to a support level on light volume. Obviously,
heavy selling is a sign of weakness, and we would not want to buy on a heavy
volume pullback. However, we will occasionally place stocks on the LVPB (Light
Volume Pullback List) to indicate a "re-entry" buying opportunity, when we
have already entered a position. This should be used to add to existing positions,
or to enter a position if you missed the initial entry.

LVPB Portfolio Stocks:

Conclusions

We have noted the markets propensity to keep this uptrend going. We continue
to believe that market participants see a somewhat rosy scenario unfolding
where the economy will continue to expand and the housing market will provide
the necessary drag to slow that expansion and curb inflation enough to achieve
a soft landing. Whether market participants are correct or not is yet to be
seen. The main thing is that we can't fight the tape and the long bias should
be maintained until this uptrend is broken.

For those of you who have enjoyed your subscriptions to the Fundamental Trader
and who would like to get additional savings off the price of your subscription,
you may consider an annual subscription to the service. You can save nearly
20% off of the monthly rate by selecting the annual subscription price. Just
click on the link below:http://www.stockbarometer.com/pagesMFT/learnmore.aspx

I'd like to thank all of you for actively promoting our
services to your friends, family, fellow traders and associates in 2005. If
you're interested in making some money in 2006, we've established a free referral
(affiliate) program to reward you (pay you) for any future referrals. All you
have to do is sign up for the free affiliate program and you'll get a special
link. Use that special link when recommending us to your friends, family, fellow
traders and associates and we'll pay you 80%. Better yet, if you can get them
to sign up for the affiliate program - we'll pay you another 10% on their referrals
- and if they add additional referrals, you'll get another 10% on those sales.
It's our way of saying thank you for your continued support. Here's a link
with the details (it's on the home page of our site): http://www.stockbarometer.com/affiliate.aspx

Want to trade options? Then trymy Stock Options Speculator. It
is issued at least weekly and recommends very aggressive stock options plays
that target >100% gains. Click
here for a 4-week Free Trial.

All profit examples are hypothetical, assuming that
subscribers bought and sold at the time the recommendations were issued.
Actual results can and do vary based on day of execution and commission charges.

There is a very high degree of risk involved in trading.
Past results are not indicative of future returns. The Fundamental Trader
and all individuals affiliated with The Fundamental Trader assume no responsibilities
for your trading and investment results.